Closing Enron Loophole Would Drop Oil Prices 25%

The farm bill’s “loophole closure” amendment doesn’t really close the loophole. It just gives the CFTC some more teeth - if they choose to use them.

Prior to the CFMA being passed in December 2000, all energy futures were “non-exempt” products and as such, fully regulated by the CFTC.

The “Enron loophole” took energy futures out from under CFTC reporting and position limit regulations.

The “loophole closure” doesn’t put energy futures back into the “non-exempt” category of futures. Instead, the CFTC is being given the regulatory authority to examine energy futures on a contract-by-contract basis and make a (rather expensive and time-consuming) regulatory finding (if they so choose) that a particular energy future should be regulated.

In other words, the loophole isn’t closed. The CFTC has been given a set of regulatory tools, which if used with herculean persistence, could close the loophole. This is akin to being given a teaspoon with which you’re being offered the job of digging a ditches.

Here, let’s let a former director of trading & markets at the CFTC explain this situation in great detail:

http://commerce.senate.gov/public/_files/IMGJune3Testimony0.pdf

THanks. If I could ask another question, it seems to me the loophole is not a different legal way to do things, it is simply a removal of regulations which makes it easier for people to break the law. Is that the case? If the markets are being manipulated, would it be because they are acting illegally, but we simply don’t know?

If they aren’t acting illegally, how would a full regulatory restoration stop what they are doing? Or would the rest of the market clearly knowing that someone was playing with them be enough to tank the market?

BTW, is there an upside to removing regulations, or do you see it as a bad thing that should simply be repealed? I’m not against appropriate policing of markets, to make sure everybody plays fair and doesn’t manipulate things to distort the market. But I don’t see regulation being able to decrease prices by itself.

Lastly, if the real problems are in ICE, and we have no regulatory power over ICE, how could anything we do in the U.S. fix any “speculation bubble”?

I still think that if people weren’t willing to pay $4.00 for gasoline, the market would have tanked — and in fact the new oil price appears to be appropriate for businesses who want to maximize how much money they make. Why sell gas for $2.00 when you can sell just about as much at $4.00?

It would be like being upset that Microsoft charges over a hundred bucks for Word, when they make “obscene profits” and it only costs them pennies to manufacture. Obviously, Microsoft could sell all their software for much cheaper, and still make money. But should they have to?

Of course, Oil is a “necessity”. We do regulate prices on electricity and local phone service, other “necessities”, and we regulate cable TV, radio and TV stations. And we nationalized mail service (although not package delivery).

I’m not saying these are good things, just that we have decided that some markets should be controlled for some reason.

I wonder how many conservatives would accept drilling in ANWR in exchange for the drilling to be done by our government?

The “loophole” (aka the “Commodity Futures Modernization Act of 2000”) took the CFTC out of the loop on electronic energy exchanges. Before that, energy futures were traded just as ag futures are, with position reporting, position limits, etc.

The trading happening now isn’t illegal, per se. Amaranth was illegal because they were trading natgas futures on NYMEX, they received an enforcement letter from the CFTC and instead of changing their positions to conform with position limits, they moved their trades over to ICE. The move after being told by the CFTC is what made it illegal.

With ICE prior to this spring, if you started trading crude or natgas futures on ICE in a big way, then how was the CFTC to know jack about it? The reporting requirement was lax, there were no position limits, and there is no difference between a speculator, hedger or commercial trader.

All that has to be done, IMO, is make the electronic exchanges subject to the exact same regulation as we’ve had in the CBOT ag futures exchanges since 1922. This would require position limits (ie, how many futures you can accumulate in a short or long position without having physical commodity against which you can assign the contracts) and require that these positions be reported to the CFTC so that they can accurately reflect the positions in the “commitment of traders” reports. This kept things working pretty well from 1922 to 2000. I can’t see any reason why the US taxpayer or small players in the futures market should accept any excuses for changing what has worked for 78 years. The reason for the changes was that big energy traders with no physical resources wanted to create a “virtual power company” or a “virtual oil company,” etc.

The CFTC is allowing ICE and foreign exchanges (London, Dubai) to operate in the US not as a policy decision, but as a result of a “no action” letter - it, these exchanged come to the CFTC and ask “Hey, would doing XYZ violate the law/regulations?” and the CFTC looks at it and if they don’t see a violation, they send a “no action” letter.

This is NOT the same thing as pro-active policy making, and the CFTC is allowing these foreign exchanges to conduct their own rulemaking and compliance enforcement, as long as they claim (or promise) that their regs and enforcement would meet or exceed US standards.

The simplest thing to do is undo the CFMA. Put all commodities exchanges, electronic or otherwise, back under the CFTC, and all exchanges and contracts across all exchanges are subject to the same regulations, position limits, reporting, etc. This way, there is no “regulatory arbitration” between exchanges. All foreign exchanges operating terminals in the US should be subject to CFTC regulation.

Bart Stupak (D-MI) did an investigation of the current futures markets and found credible evidence of price manipulation, but that it wasn’t illegal:

http://www.lloyds.com/CmsPhoenix/DowJonesArticle.aspx?id=393893

Goldman and Morgan Stanley. Funny, aren’t those two of the houses that own ICE? Another funny coincidence. Golly.

As for the market tanking: Just wait. We’re headed for some very rocky times. Refining margins have been crushed, their hedge programs are getting rolled, and some refiners (as well as fuel distributors) are close to having to shut down for reasons of cash flow starvation. They simply cannot pass cost increases through their sales chains fast enough to keep up with the futures markets. Look at the stock price charts for pure refining plays like Tesoro (TSO) to see what the market thinks of the future earnings of refiners.

“Free markets” cannot exist where some players are allowed to enjoy preferential advantage, and that’s what is happening here. To have “free markets” we have to have a level playing field. The GOP seems to have forgotten this, and that the job of the government is to ensure open and fair markets. Phil Gramm was the guy who carried the water on the CFMA in 2000, and now he’s the “economic advisor” to the McCain campaign. Lovely. Were I given the power to deal with the situation, there would be a lot more regulation than there is now in the financial markets, because the oil/natural gas speculation, the mortgage market melt down (and now the taxpayer funded bailouts of the guilty), coupled with the explosion in absurd derivative products and even more absurd levels of leverage show that Wall Street cannot regulate themselves.

Uncle Sammy is going to have to stand watch over the markets with a real big enforcement stick.

The claims that “the trading will simply go somewhere else” ring hollow for me. We’re still the biggest capital market in the world. If you want to make real money in finance, you have to do business in the US, period, end of story.

“regulatory arbitrage” is what I meant to say — ie, playing the rules of one exchange off against another to gain an edge in prices (and possibly derivative contracts).

Thanks. I don’t generally like government regulation, but there are places it makes sense. If there was a way for the market to correct itself, we might not need regulation, but this market doesn’t seem to have any natural way to correct, other than disaster.

If this thing proves to be true as described, the Republicans can kiss the White House, Senate and The House good bye for a very long time.
Further more, if it proves that Senator Graham did participate in this scam knowingly, I will be very, very pissed off...you can take it from there!

When voters keep returning commies like Maxine Waters and John Conyers and Tom Harkin to office, it shows the voters are clueless just as the demcorat party

You should see Waters district...a dump, welfare free loaders, stuck on stupid at a 95 percentage. What do you expect from that crowd?

Looks like Wall Street (at least a part of it ;>) agrees with me:

A new report from Wall Street research house Sanford C. Bernstein says that California actually could start producing new oil within one year if the moratorium were lifted.

http://www.freerepublic.com/focus/f-news/2045982/posts

;>)